Technical Indicators

Technical indicators is a measurement metric used to determine future financial, stocks or economic trends. Indicators take price, time and volume as their input.

An indicator is a mathematical calculation of data point series based on a securities price and volume over a period of time, it may includes any combination of the open, close, high or low. The most common usage is using the closing prices to calculate the indicator. End of Day or EOD data are available to download by various EOD data provider either free of charges or paid services. The result of indicator data points are use to plot a chart to determine the trend of a market, the strength of the market and the direction of the market. In economic context, an indicator could be interest rate, unemployment rate, stock market indicators such as MACD, RSI, etc...

Leading Indicators and Lagging Indicators

Leading indicators change before the underneath commodity change, lagging indicators behind or follow the event.

The main benefits of leading indicators is the early signaling for entry and exit, it generate more signals and allow more opportunities to trade in trading markets. On the other hand, more signals and earlier signals mean that the changes of false signals will also increase that might increase the potential losses.

Lagging indicators follow the price action and are also known as trend-following indicators. Trend-following indicators work best when markets or securities develop a strong trends and signal traders to take long position and keep them holding the position as long as the trend is intact. Trend indicators are not effective in trading or sideways markets and tend to lead to many false signals. Late signal that cause late entry is the only disadvantage of trend-following indicators.

If you increase the sensitivity of an indicator, it will produce early signals but generate more false signal as well. If you prolong the time period to reduce the false signal, the sensitivity will decrease and yield a lagging indicator.

Select indicators from difference category base on difference input is the best way to avoid Multicollinearity trap and Sycophants traps.

Multicollinearity is a statistical term refer to unknowingly uses the same type of indicator or information more than once, This is a common mistake in technical analysis.

Arrange and group technical indicators in categories to keep you away from multicollinearity problem. Here is the  four categories of popular technical indicators.

Trend Indicators

Use trend indicators to determine future direction and trend.

1. Directional Movement System.

2. MACD.

3. TRIX indicator.

4. Parabolic SAR.

5. Moving Average.

6. Commodity Channel Index CCI

Volume Indicators

Use volume indicators to confirm the strength of the trend.

1. Volume Oscillator.

2. On Balance Volume.

3. Chaikin Oscillator.

4. Money Flow Index.

5. Compare Range and Volume.

Momentum Indicators

Use momentum indicators to determine the speed at which price is changing.

1. Relative Strength Index RSI.

2. Rate of Change (Price).

3. Momentum.

4. Stochastic.

5. Williams %R.

Volatility Indicators

Volatility indicators is use to judge the strength of the trend and breakouts.

1. Bollinger Bands.

2. Volatility.

3. Chaikin Volatility.

4. Volatility Ratio.

5. Average True Range.